Office Market Out Of Kilter Until 2025, Cushman & Wakefield Predicts

The recovery of the U.S. office market from the impact of the coronavirus pandemic and recession is going to be a slow process, likely stretching beyond 2024, Cushman & Wakefield predicts in a new report on the future of office space worldwide. 

The recovery might be slow, but the pandemic doesn't necessarily mean the end of established patterns of office space use.

"Even though the impact of work-from-home trends will slow the office market recovery, the overall growth in office-using job sectors along with many other factors — including agglomeration, culture/branding, and productivity — indicate that the office will continue to play an important role in the economy going forward,” Cushman & Wakefield Global Head of Forecasting Rebecca Rockey said in a statement. 

The report predicts that the U.S. office sector will lose about 145M SF of office occupancy in 2020 and 2021 as the result of the economy losing a net 1.7 million office jobs. As of Q2 2020, the office sector has already lost 23.1M SF of occupied space nationwide, with negative absorption continuing for at least another 18 months.

All together, a 145M SF contraction in occupied space is about 2.7% of the entire U.S. office inventory as of Q1 2020, the report notes. That would mean the current contraction, if it follows the baseline scenario, would be worse than the contraction of the Great Recession of 2.2%, or that of the dot-com recession of 2001, which saw a loss of 2.4% of occupied office space.

The pandemic is only part of the reason for negative office absorption, according to Cushman & Wakefield. Even without it, absorption rates were in decline, because businesses were using fewer square feet per employee. 

That trend has come to a halt, but more employees will probably work from home in coming years, even after the end of the pandemic. That would put downward pressure on the demand for office space in a way that densification did previously.

Before the pandemic, Cushman & Wakefield reported that U.S. office vacancy was 13.2%. Under its baseline scenario, vacancies will peak at 17.6% in mid-2022 and fall after that, but not to pre-pandemic levels by 2024, the last year of the scenario. Only once before have office vacancies been as high: After the dot-com bust, they hit 17.6% in Q3 2003.

Office rents will contract in both 2021 and '22, the report predicts, by 6.5% and 2.3%, respectively, before starting to grow again in 2023 by 2.6% and in 2024 by 3.5%.

The baseline scenario is one in which the economy has a 50% chance of doing better than predicted by the scenario, but also a 50% chance of doing worse. The report also included a downside scenario, in which the economy has only a 10% chance of doing worse than in the scenario.

In the downside scenario, negative net absorption in U.S. office space continues through 2022 and totals 243.2M SF, vacancy peaks at 19.9% in 2022 and is nowhere near pre-pandemic levels by 2024, and rents contract 8.4% and 7.5% in 2021 and '22, respectively.

Considered as a whole, the global office market will recover sooner than the U.S. market, with global vacancies back to pre-pandemic levels by 2025, the report predicts under a global baseline scenario.

Some parts of the world will not see any negative office absorption at all, but rather a slowing down of positive absorption for a while. China, for instance, will experience net absorption of only 5.5M SF in 2021, down from 30.9M SF this year. But the report predicts it will bounce back to 38.2M in positive absorption in 2022. Office absorption will likewise slow down, but not go into reverse, in the wider Asia-Pacific region.